Motivated by the recent European debt crisis, this paper investigates the scope for a bailout guarantee in a sovereign … debt crisis. Defaults may arise from negative income shocks, government impatience or a "sunspot"-coordinated buyers strike …. We introduce a bailout agency, and characterize the minimal actuarially fair intervention that guarantees the no …

The European sovereign debt crisis is characterized by the simultaneous surge in borrowing costs in the GIPS countries … 1998 and 2012. Our key theoretical argument is related to the bail-out guarantee provided by a monetary union, which …

borrowers misprice the option to default with a U-shaped negative pricing error. The myopia discount changes the optimal bailout … policy. Myopia gets punished when the distortions from default mispricing outweigh the future bailout costs, resulting in … procrastinated default and protracted crises. The model shows that (i) myopia is an important determinant for bailout policy, (ii …

expected changes in debt/GDP ratios of the respective countries. Our model explains spreads both before and during the crisis …